2020 (1) TMI 1718 - AT - Income Tax

Assessment reopening upheld, interest-free loan to Italian subsidiary must be benchmarked at arm's length under Section 92

M/s. Bombay Rayon Holdings Ltd. Versus Income Tax Officer – 9 (2) (2) Mumbai

ITAT Mumbai upheld reopening of assessment based on survey proceedings, rejecting assessee's challenge. For TP adjustment on interest-free loan to Italian ... Reopening of assessment - TP adjustment - interest on transaction of loan advanced by the appellant to its associated enterprise ('AE') in Italy - as submitted that assessee had not paid any interest for funds received from the holding company, which was advanced for the purpose of business and it has been clarified that sums were obtained from the holding company through internal accruals. Only challenge to reopening is that the revenue has erred in relying upon the survey proceedings and statement obtained from the M.D during the survey proceedings - HELD THAT:- Reliance on decision of S.Kadar Khan [2013 (6) TMI 305 - SC ORDER] is wholly irrelevant here. In the said decision, the exposition was that statement obtained on survey is not conclusive proof of addition to be made. We fail to understand how this decision renders reliance by the revenue upon survey proceedings as basis for reopening illegal. As it is settled law that at the time of reopening, there has to be a reasonable belief that income has escaped assessment, the same need not be proved to the hilt. Hence, assessee’s submission in this regard has no merit and they are liable to be dismissed. TP Adjustment on interest on loan to AEs - The commercial expediency of a loan to subsidiary is wholly irrelevant in ascertaining arm's length interest on such a loan. There is indeed no bar on anyone advancing an interest free loans to anyone but when such transactions are covered by the international transactions between the associated enterprise, Section 92 of the Act mandates that the income from such transactions is to be computed on the basis of arm's length price. It is amply clear that loan to the AE is international transaction and it needs to be benchmarked for ALP determination. As in the present case the entire amount has been written off as non-refundable. So the decision of KSS Ltd. does not help the case of the assessee. Rather it has been rightly relied upon by the ld. departmental representative in support of the proposition that interest free sums given to the AE dehors any cogent documentation of purpose are liable for determination of arm’s length price as per provisions of Section 92B Explanation C. Loan has been converted into share application money - A.Y.2010-11 - Assessee has full control over the AE. It could not be said that giving further loans and considering it as share application advance can strengthen assessee’s control over the same. Hence, the plea that the loan was advanced as strategic shareholder function totally fails. Moreover it is not the issue of inordinate delay of conversion of share application money into share capital. The fact is that the issue of conversion into share capital was given a complete go by and subsequently the entire amount was written off as irrecoverable. Hence, the case laws relied by the assessee’s Counsel are in totally different context. Hence, this plea does not fortify the case of the assessee. Application on interest rate on the said sum advanced - We hold that the arm’s length price computed by adopting the lending rate of banks in India is not sustainable. In this regard, we agree with the alternative submission of the assessee that the interest should be charged at LIBOR+200 bps. Such charging of interest has been approved by Hon’ble Jurisdictional High Court in several other case laws. We direct accordingly. It may not be out of place to mention that revenue’s insistence on application of bank rates in India will throw open the issue of assessee not incurring any expenditure on the funds for advancing the loan. As we have already held this issue is not to be considered for the computation of arm’s length price for an international transaction here. Additional ground - assessee has raised the issue of arm’s length price of international transaction of interest free loans being computed on adhoc basis and not in accordance with Section 92C of the Income Tax Act - As we note that assessee has not provided any details whatsoever. Assessee has itself not done any benchmarking. Our decision as above has the mandate of Hon’ble Jurisdictional High Court in the case of Tata Autocomp systems Ltd [2015 (4) TMI 681 - BOMBAY HIGH COURT] Hence, this additional ground raised by the assessee is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:1. Whether the transfer pricing adjustment made on account of interest on loans advanced by the assessee to its associated enterprise (AE) in Italy is justified under the provisions of Section 92C(1) and 92C(2) of the Income Tax Act, 1961.2. The legality of reopening the assessment under Section 148 of the Income Tax Act based on information received from a survey action.3. Whether the final assessment order was passed in conformity with the directions of the Dispute Resolution Panel (DRP) as required by Section 144C(13) of the Act.4. The appropriateness of the interest rate applied by the Transfer Pricing Officer (TPO) and the DRP, specifically the application of SBI PLR + 300 basis points.5. The classification and treatment of loans advanced to the AE and their conversion into share application money.6. The computation of interest under Sections 234B and 234C of the Act and the initiation of penalties under Sections 271(l)(c), 271BA, and 271FA.ISSUE-WISE DETAILED ANALYSIS1. Transfer Pricing Adjustment on Interest-Free LoansLegal Framework and Precedents: The relevant legal provisions include Sections 92C(1) and 92C(2) of the Income Tax Act, which deal with the computation of arm's length price for international transactions. The TPO and DRP applied these provisions to determine the arm's length price for the interest-free loans advanced by the assessee to its AE.Court's Interpretation and Reasoning: The TPO and DRP concluded that the loans constituted an international transaction requiring arm's length pricing. The DRP rejected the assessee's argument that the loans were advanced due to business expediency and were part of shareholder activities.Key Evidence and Findings: The TPO noted the absence of a loan agreement, the unsecured nature of the loans, and the lack of interest charged by the assessee. The DRP emphasized the lack of documentation and the fact that the loans were denominated in Indian Rupees.Application of Law to Facts: The TPO applied SBI PLR + 300 basis points as the interest rate, while also computing an alternate adjustment using Euro LIBOR + spread. The DRP upheld the TPO's application of SBI PLR, citing the absence of evidence supporting the assessee's claims.Treatment of Competing Arguments: The assessee's arguments regarding business expediency, conversion to share application money, and the applicability of LIBOR rates were rejected by the TPO and DRP, who relied on various judicial precedents to support their conclusions.Conclusions: The court upheld the transfer pricing adjustment, emphasizing the need for arm's length pricing in international transactions.2. Reopening of AssessmentLegal Framework and Precedents: Section 148 of the Income Tax Act allows for the reopening of assessments based on information suggesting income has escaped assessment.Court's Interpretation and Reasoning: The court found that the reopening was justified based on information obtained during a survey action, which indicated that the assessee had advanced interest-free loans to its AE.Key Evidence and Findings: The reopening was based on a statement from the Managing Director of the holding company, recorded during the survey, agreeing that interest should have been charged on the loans.Application of Law to Facts: The court held that the reopening was valid, as the information provided a reasonable basis for believing that income had escaped assessment.Treatment of Competing Arguments: The assessee's reliance on the Supreme Court decision in CIT vs. Kadar Khan Sons was deemed irrelevant, as the reopening was based on a reasonable belief of escaped income.Conclusions: The court upheld the reopening of the assessment, finding it legally justified.3. Interest Rate ApplicationLegal Framework and Precedents: The determination of the appropriate interest rate for benchmarking international transactions is guided by the arm's length principle.Court's Interpretation and Reasoning: The DRP and TPO applied SBI PLR + 300 basis points, while also considering Euro LIBOR + spread as an alternate rate.Key Evidence and Findings: The DRP noted the lack of evidence supporting the use of foreign currency interest rates and emphasized the Indian Rupee denomination of the loans.Application of Law to Facts: The court found that the application of SBI PLR was justified due to the lack of documentation supporting the assessee's claims.Treatment of Competing Arguments: The court rejected the assessee's argument for applying LIBOR rates, citing the absence of supporting evidence and documentation.Conclusions: The court upheld the application of SBI PLR + 300 basis points as the appropriate interest rate.4. Conversion to Share Application MoneyLegal Framework and Precedents: The classification of funds as loans or share application money affects their treatment under transfer pricing regulations.Court's Interpretation and Reasoning: The DRP held that the conversion of loans to share application money did not change their nature as loans, given the lack of share allotment and subsequent write-off.Key Evidence and Findings: The DRP noted the absence of share allotment and the eventual write-off of the amounts as evidence that the funds were not part of shareholder activities.Application of Law to Facts: The court found that the funds retained their character as loans and were subject to arm's length pricing.Treatment of Competing Arguments: The court rejected the assessee's argument that the funds were part of shareholder activities, citing the lack of evidence and documentation.Conclusions: The court upheld the classification of the funds as loans, subject to transfer pricing adjustments.SIGNIFICANT HOLDINGSThe court established several core principles and final determinations:- The court emphasized the necessity of arm's length pricing for international transactions, particularly in the absence of documentation supporting the assessee's claims.- The court upheld the validity of reopening the assessment based on information from a survey action, emphasizing the reasonable belief of escaped income.- The court confirmed the appropriateness of applying SBI PLR + 300 basis points as the interest rate for benchmarking the loans, given the lack of evidence supporting alternative rates.- The court rejected the classification of funds as share application money without evidence of share allotment, treating them as loans subject to transfer pricing adjustments.In conclusion, the court's judgment reinforces the importance of adhering to transfer pricing regulations and the arm's length principle in international transactions, while also affirming the validity of reopening assessments based on reasonable beliefs of escaped income.